In a Colorado drop-shipment, can the seller accept an out-of-state resale or exemption certificate, whose certificate counts, and what form is used?

Plain-English summary

An out-of-state company drop-ships its products to consumers in Colorado. It has nexus here because an affiliated sister company maintains a service office in Colorado. It asked three documentation questions: (1) Does Colorado accept resale certificates from other states, and what form does a drop-ship customer use? (2) If the drop-ship seller has no certificate but the customer does, can the company accept the customer's certificate? (3) For drop shipments to an installer, fabricator, or freight-forwarder, must the certificate be for that address or for the end user?

The Department's general guidance:

• Out-of-state licenses are accepted for resale. As a wholesaler, the company may accept a buyer's sales tax license issued by another state to document a resale exemption. Example: it sells to an out-of-state retailer (no Colorado nexus) who resells to a Colorado consumer — that's an exempt sale for resale. The company should have the out-of-state retailer sign the Multistate Tax Commission Uniform Sales & Use Tax Certificate—Multijurisdiction (DR 0563), and must retain a copy of the license or verify its validity. Colorado has no standalone resale certificate; it accepts the MTC multijurisdiction form, but not for purchasing a taxable service for resale.
• Out-of-state exemption certificates are accepted too (§ 39-26-105(1)(c)). If the company sells directly to a consumer who holds an out-of-state exemption certificate, it need not collect tax.
• The trap: if the company sells to a retailer who has no Colorado or other-state license/certificate, the company must collect tax from that retailer — even if the ultimate consumer is exempt. The consumer's remedy is a refund claim on DR 0137.
• Fabricators/installers must hold a sales tax license in their own name to claim the resale exemption; they may instead claim the consumer's exemption certificate for real-property fixtures (e.g., built-in stoves/ovens) when the consumer is a government, charitable organization (including churches/synagogues), or public (not private) school (§ 39-26-708(1)). The company isn't required to determine whether the fabricator/installer qualifies and may honor its resale request.
• Freight-forwarders: the Department isn't clear when one would need a resale certificate, since a freight-forwarder generally isn't buying or selling the product — it acts as an agent to deliver it.

Throughout, the seller bears the burden of verifying the license or certificate.

What this means for you

Out-of-state sellers and drop-shippers into Colorado

You can accept another state's sales tax license or exemption certificate to support a resale or exempt sale — use the MTC multijurisdiction form (DR 0563) and keep a copy or verify it. The big exposure is selling to a middle-tier retailer with no license at all: you must collect tax from that retailer regardless of whether the end customer is exempt. Don't rely on the consumer's exemption to excuse an undocumented sale to a retailer.

Fabricators, installers, and contractors

To buy for resale, hold a sales tax license in your own name. You can use a tax-exempt customer's certificate only for real-property fixtures and only when the customer is a government, charitable org, or public school. (Beware: under the contractor rules, a lump-sum installer is often the consumer of materials and can't claim resale at all.)

Accountants and tax professionals

Key points: Colorado has no dedicated resale certificate (use the MTC form, not for taxable services for resale); out-of-state licenses/certificates are honored (§ 39-26-105(1)(c)); an undocumented mid-chain retailer breaks the resale chain and forces tax collection with the consumer relegated to a DR 0137 refund; fixtures-for-exempt-orgs run through § 39-26-708(1); and verification burden is on the seller. Resale-chain and drop-shipment cousins: [[plr-13-007-private-letter-ruling]] (reseller vs broker), [[plr-13-004-private-letter-ruling]] (contractor resale), [[plr-24-008-sourcing-sales-when-customer-arranges-for-third-party-shipping]] (third-party shipping), and [[gil-13-002-sales-tax-refunds-when-an-exemption-certificate-is-provided-after-the]] (late-certificate refunds). Watch the home-rule-city caveat below.

Common questions

Q: Does Colorado accept resale or exemption certificates from other states?
A: Yes. A wholesaler may accept another state's sales tax license to document a resale exemption, and a retailer may accept an exemption certificate issued by another state. Colorado has no standalone resale certificate; it uses the MTC Uniform Sales & Use Tax Certificate—Multijurisdiction (DR 0563) — but not for buying taxable services for resale.

Q: The end customer is exempt, but the retailer I sold to has no license. Do I still collect tax?
A: Yes. If you sell to a retailer with no Colorado or other-state license/certificate, you must collect tax from that retailer even if the ultimate consumer is exempt. The consumer can then file a refund claim on DR 0137.

Q: Can a fabricator or installer buy tax-free for resale?
A: Only if it holds a sales tax license in its own name. It may instead use a tax-exempt customer's certificate for real-property fixtures when the customer is a government, charitable organization, or public school.

Q: What about a freight-forwarder in the chain?
A: A freight-forwarder generally isn't buying or selling the goods — it acts as an agent to deliver them — so the Department wasn't clear it needs a resale certificate at all.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department, and makes no determination on specific facts. It also doesn't cover self-collected home-rule city taxes.

Citations and references

Statutes and references:
- § 39-26-105(1)(c), C.R.S. (a retailer may accept an exemption certificate issued by another state)
- § 39-26-708(1), C.R.S. (tax-free purchases of real-property fixtures and building materials for tax-exempt organizations)
- Form DR 0563 (MTC Uniform Sales & Use Tax Certificate—Multijurisdiction); Form DR 0137 (purchaser claim for refund)
- Department Publication/FYI Sales 1 (documenting exempt sales) and Sales 3 (out-of-state tax-exempt organizations doing business in Colorado)

Source

• Landing page: https://tax.colorado.gov/sales-use-tax-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-13-006.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-13-006
April 18, 2013
XXXXXXXXXXXXXXXXX
ATTN: XXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: Resale Exemption Certificates
Dear XXXXXXXXXXX,
You submitted on behalf XXXXXXXXXXXXXXXXXXXXXX (“Company”) a request for guidance
about resale exemption certificates.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
1. Does Colorado accept resale certificates from other states? If so, what form should a drop
shipment customer fill out to exempt themselves from taxes (i.e., multijurisdictional form,
streamlined form, or Department’s own form)?
2. If a drop shipment seller does not have an exemption certificate or Colorado resale certificate, but
the customer has such a certificate, can Company accept the consumer’s certificate?
3. If a drop shipment is made to an installer, fabricator, or freight-forwarder, does the exemption
certificate need to be for that address or for the end user?
Background
Company, which is located outside Colorado, makes drop shipments of its products to consumers
located in Colorado. Company has a sister company who has a service agency office in Colorado.

This affiliated company creates nexus for Company in Colorado. In drop shipment transactions,
sellers, installers, prefabricators may have a sales tax license. In other cases, the consumer may
have an exemption certificate. In the case of a freight-forwarder, the Department assumes that the
Company delivers goods to a freight-forwarder engaged by either seller or buyer, and either the
seller has a sales tax license or the buyer has an exemption certificate.
Discussion
Colorado allows Company, as a wholesaler, to accept a sales tax license issued by another state.1
For example, Company sells its product to a retailer, who is not located in Colorado, and retailer then
resells the product to a consumer in Colorado. Retailer does not have nexus with Colorado.
Company’s sale to the retailer is an exempt sale for resale and Company is not required to collect
sales tax from the retailer. Company can accept retailer’s out-of-state sales tax license in order to
document the resale exemption. Company must retain a copy of the sales tax license or, if there is
no expiration date on the license or the retailer provides only a license number, Company must verify
with the other state that the sales tax license is currently valid.2 Company should have out-of-state
retailer sign the form “Sales Tax Exemption Certificate: Multi-Jurisdiction (DR 0563).”
If the retailer has a Colorado sales tax license or exemption certificate, Company can verify the
validity of the Colorado exemption number at www.colorado.gov/revenue/tax > Online Services >
Sales and Use Taxes > Other Services (Verify Sales Tax License). For more information about
how retailers must document exempt sales tax transactions, see Department FYI Sales 1 “How to
Document Sales to Retailers, Tax-Exempt Organizations and Direct Pay Permit Holders.”3 It is the
burden of Company to verify the validity of the license or certificate.4
Colorado also allows a retailer to accept an exemption certificate issued by another state. 5
If Company contracts to sell its product directly to the consumer and the consumer has an exemption
certificate issued by another state, then Company is not required to collect sales tax from the
consumer. However, if Company sells its product to a retailer and the retailer does not have a sales
tax license or exemption certificate issued by Colorado or another state, then Company must collect
sales tax from the retailer, even if the ultimate consumer has an exemption certificate issued by
Colorado or another state. In such cases, the consumer can file a claim for refund using Department
Form DR 0137.
A fabricator or installer must possess a sales tax license in its own name in order to make a
purchase that qualifies as a sale for resale exemption.6 The fabricator or installer can also claim the
exemption certificate of the consumer for real property fixtures, such as built-in stoves and ovens, if
the consumer is a government, charitable organization (including churches and synagogues), or
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Colorado does not have a specific resale certificate. The State accepts the Multistate Tax Compact Uniform
Sales & Use Tax Certificate—Multi-jurisdiction, issued by the Multistate Tax Commission; however, Colorado
does not permit the use of the certificate to claim a resale exemption for the purchase of a taxable service for
resale.
Department Publication Sales 1 “How to Document Sales to Retailers, Tax-Exempt Organizations and Direct Pay
Permit Holders.” This publication can be viewed at www.colorado.gov/revenue/tax > Tax Library > FYIs > Sales.
This publication can be viewed at www.colorado.gov/revenue/tax > Tax Library > FYIs > Sales.
§39-26-105(1)(c)
Department Publication Sales 3, “Out-of-State Sales Tax-Exempt Organizations Doing Business in Colorado.”
This publication can be viewed at www.colorado.gov/revenue/tax > Tax Library > FYIs > Sales.
Fabricators and installers may fall within the Contractor rule if they use a lump sum contract and be treated as
the ultimate consumer of materials installed in real property. As such, they are not entitled to claim the sale for
resale exemption. However, Company is not required to determine whether the fabricator or installer is entitled
to the resale exemption, and is allowed to honor the fabricator’s or installer’s request for a resale exemption.

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public (but not private) school.7 Building materials for leased buildings may also be purchased tax
free if paid for by the tax-exempt organization.8 Company must retain records sufficient to establish
the exemption (see discussion above).
The Department is not clear under what circumstances a freight forwarder would be required to have
or obtain a resale exemption certification. It is the Department’s understanding that a freightforwarder is not buying or selling Company’s product, but rather is acting as an agent of Company,
retailer, or buyer to deliver the product.
Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
will be made public within 60 days of the date of this letter. Please let me know in writing within that
60 day period whether you have any suggestions or concerns about this redacted letter.
Sincerely,
Office of Tax Policy
Colorado Department of Revenue

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§39-26-708(1), C.R.S.
§39-26-708, C.R.S.

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